Inflation hits new high in Europe, slowing economy

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FILE – The Euro sculpture stands in front of the former European Central Bank in Frankfurt, Germany, July 13, 2022. (AP Photo/Michael Probst)

FRANKFURT, Germany — Inflation has hit a new high in the 19 countries that use the euro, fueled by runaway natural gas and electricity prices due to Russia’s war in Ukraine. Economic growth has also slowed ahead of what economists fear is a looming recession, largely due to higher prices sapping Europeans’ ability to spend.

Annual inflation hit 10.7% in October, the European Union’s statistical agency Eurostat reported on Monday. This is up from 9.9% in September and the highest since statistics began to be compiled for the euro zone in 1997.

Natural gas prices soared following the invasion of Ukraine as Russia cut pipeline supplies to a trickle of pre-war levels. Europe has had to resort to expensive shipments of liquefied gas by ship from the United States and Qatar to keep generating electricity and heating homes.

While liquid gas has managed to fill Europe’s storage for the winter, rising prices have made some industrial products such as steel or fertilizers expensive or simply unprofitable to manufacture. Consumer purchasing power has been depleted in stores and elsewhere as more income goes to pay fuel and utility bills and basics such as food become more expensive.

Natural gas prices for short-term purchases have eased recently, but remain elevated in markets for months to come, suggesting that expensive energy could be a lingering drag on the economy. A survey of professional forecasts last week by the European Central Bank showed inflation expectations for next year rose to 5.8% from 3.6% expected three months ago.

The inflation epidemic has been an international phenomenon, driving prices to nearly 40-year highs in the United States as well.

Eurostat figures showed food, alcohol and tobacco prices increasingly joined energy prices as a major contributor, up 13.1%, while prices energy increased by 41.9% compared to the previous year.

Inflation figures varied considerably from country to country, ranging from 7.1% in France to 16.8% in the Netherlands among the largest member economies, while the highest were recorded in the three Baltic countries: Estonia at 22.4%, Latvia at 21.8% and Lithuania at 22%.

The economy, which had rebounded from the COVID-19 pandemic, grew 0.2% in the July-September period, slowing from 0.8% in the second quarter. Economists say one of the main reasons is rising prices, and many predict the economy will contract in the final months of this year and the first part of next year.

Gross domestic product growth was higher than expected due to strong government support that softened the hit to people’s incomes from inflation as well as the pent up savings consumers had left behind after the worst pandemic restrictions , said Joerg Zeuner, chief economist. at Union Investments.

“However, there is no reason to rejoice,” he said. “The GDP figures, along with many other indicators, show that the economy has clearly lost steam over the summer.”

With more recent data weakening, “it’s a question of the depth of the recession and not whether there will be one,” the economists at Oxford Economics wrote.

Rising inflation sent a chain of jolts through the economy and financial markets.

This led the European Central Bank to raise interest rates at the fastest pace in its history with back-to-back three-quarter-point increases at its Oct. 27 and Sept. 8 meetings. This has pushed up borrowing costs in the market for businesses and governments and raised fears that the war on inflation will hurt growth.

Higher rates from the ECB and the US Federal Reserve also rattled equity and bond markets, which had been buoyed by years of weak central bank benchmarks and money-printing stimulus.

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